The archived blog of the Project On Government Oversight (POGO).

Jun 21, 2012

The Guerilla Warfare of Pentagon Contractors

By BEN FREEMAN, PH.D.

Defense contractors, in their relentless campaign to avoid reductions in Pentagon spending and, consequently, the hundreds of billions of taxpayer dollars they receive every year, have started taking hostages—their own employees.

Last week Politicoreported that defense contractor's new plan is to “Threaten to send out layoff notices—hundreds of thousands of them, right before Election Day.” This threat is intended to frighten incumbents into rolling back the impending Budget Control Act sequestration, which would reduce Pentagon spending by roughly ten percent.

Despite the doomsday rhetoric and contractor funded “studies” reporting grossly overinflated job losses they claim would result if the Pentagon’s more than half a trillion dollar budget is cut, there is absolutely no reason these companies would need to have massive layoffs. This is nothing more than a political stunt.

The reason for such tactics is simple—defense contractors are getting more money from taxpayers than they ever have save one year. 2011 was a record year only bested by the $397.2 billion the defense industry received in 2008 from the Pentagon. A Price Waterhouse Coopers (PWC) review of the aerospace and defense industry rejoiced that 2011 “delivers a second consecutive year of record revenues and profits.”

In fiscal year 2011, defense contractors received more than $373 billion in Pentagon contracts, according to data from USASpending.gov. The $373 billion in taxpayer money defense contractors received was also more than double what all the troops in our military received in 2011—a fact the contractor lobby conveniently ignores while hiding its pleas for more taxpayer money behind a patriotic mask. Even if defense contractors had to bear all of the cuts from defense sequestration—an implausible scenario—they would still receive more than $300 billion per year from taxpayers. According to the Center for Strategic and Budgetary Assessments, sequestration would reduce Pentagon spending to 2007 levels, a year in which the U.S. was fighting two wars and defense contractors received more than $333 billion in taxpayer money.

In addition to the cushion provided by these record profits, the defense industry has even less cause for sacrificing jobs, based upon the analysis of one prominent defense industry advocate. Loren Thompson of the Lexington Institute, a defense contractor funded think tank, notes that the actual impact of sequestration on Pentagon spending is far less than his funders fear. Sequestration targets “budget authority rather than outlays. Budget authority typically takes several years to translate into outlays,” according to Thompson. Thus, “the reduction in defense outlays for 2013 will be only 5-6 percent.” Which is a far smaller percentage than contractors are using in their “study” to arrive at their hyperbolic claim that more than one million jobs will be lost if sequestration occurs.

Additionally, many of the major defense contractors have massive backlogs that will help to maintain their revenue streams for years to come. According to the PWC review, Lockheed Martin has an $81 billion backlog, Boeing has a $46 billion backlog, and both General Dynamics and Northrop Grumman have $40 billion backlogs. All of these dollar amounts are vastly greater than the amount of contracts the firms received from the Pentagon in 2011 or any year. Thus, once again, the notion that sequestration will bring the defense industry to a screeching halt simply isn’t true.

If you’re still unconvinced that these contractor’s cries of poverty run a tad weak, consider what the heads of major defense contractors are making.

Last year, Lockheed Martin’s Chairman and Chief Executive Officer, Robert J. Stevens’ total compensation exceeded $25 million. But even Stevens’ exorbitant compensation package could not top Northrop Grumman’s Wesley G. Bush, whose compensation package in 2011 exceeded $26 million. To put these compensation packages in perspective, both Stevens and Bush earned more than all but two Wall Street executives. Yet, the defense industry is clamoring about how tough times are and how they’ll be forced to axe workers.

Both Lockheed Martin and Northrop Grumman could afford to keep paying quite a few of their employees by dipping into their CEO's compensation. Unfortunately, it appears they’re more interested in playing political games, using their employee’s livelihoods in a game of chicken with Congress. If the CEO’s of major defense contractors are serious about saving money on personnel costs perhaps they should look no further than the mirror.

Comments

I worked for a defense contractor in the 90s. The day before the 1994 midterm election they threatened us with our jobs saying if the Republicans didn't do well we could expect layoffs. The GOP swept the election, but they still had a massive layoff around mid-December.

Andy, are you serious ? Did you understand anything in the article ? First of all the author was trying to make the point that CEO's are making tens of millions of dollars while threatening to lay of employees when they have no reason to. He wasn't really saying it would save all those jobs by dipping in to CEO compensation.
Also, a 10% cut in the PENTAGONS budget does not mean the defense contractors would see a 10% cut, because they wouldn't. And, even if they all faced 10% cuts, they would still be bringing in near record profits. So threatening to lay off thousands of employees is a completely political threat, a way to scare Congress into giving them more and more TAX PAYER money. Yes, the vast majority (and sometimes all) of their contracts are government contracts, which means they are receiving tax payer money. Also, the "suppliers" you talk about are mostly companies from other countries, not American companies.
But the bottom line is that the defense industry is growing out of control. It is a private industry that makes billions of dollars in profits off of wars, in which thousands of Americans lives have been lost fighting. Instead of tax payer dollars going to give our soldiers better pay (they get paid dirt)and benefits for fighting our wars, these defense contractors spend tens of millions of dollars to lobby Congress for more and more tax payer funded contracts. On top of all of this, these contractors have taken tens of billions of our dollars to do certain jobs which they never did (mainly overseas).
Anyway, I really hope you just misunderstood what the author was trying to say and the point he was trying to make (instead of having no clue about anything regarding the defense industry). Clearly, though, the points you were trying to make were wrong to put it mildly.

I think the author was being rhetorical when referring to executives taking money out of their compensation for workers. These ARE, after all, the people who are planning to use (arbitrarily) the day before election day to send out layoff notices!

On your other points, I cannot imagine how the supplier chain is going to be devastated when Lockheed Martin has an $81 billion dollar backlog, Boeing at $46 billion, and GD and Northrup $40 billion in backlogs. Just in Time (JIT) policies would ensure that they would not be sitting on a huge amount of spares, so their suppliers should be in good shape for some time to come.

Maybe the article simply postulates how morally bankrupt the CEOS of these Defense Vultures really are?

You said: "Both Lockheed Martin and Northrop Grumman could afford to keep paying quite a few of their employees by dipping into their CEO's compensation."

Is that really what you think will happen? CEOs will pay a few employees out of their own paycheck? Do you really think that the number of employees that they could pay out of their own paycheck will eliminate the loss of jobs?

What about the suppliers? What about the people that work at those companies that supply goods to Lockheed and Northrop? Will the CEO's be able to protect those jobs too?

Or maybe your article simply proves your lack of understanding of how the business world really works. Be honest... if you are running a business and you know that 10% of your buyers are about to disappear (you just don't know which ones), are you going to continue to buy products from suppliers? Are you going to ignore the law that says you have to give your employees 60 days warning if layoffs are imminent?